The New Drivers of Gold Prices

Luke Gromen, founder and president of Forest for the Trees, and Brent Johnson, CEO of Santiago Capital, are well known for challenging each other’s views on Twitter. In this episode of Skin in the Game, they carry on their conversation from The Exchange and delve into the dynamics of the gold market today. They discuss the evolving role of China, debate whether a new version of the Bretton Woods agreement is being built, and inevitably discuss the fortunes of the dollar and renminbi. Filmed on January 28, 2019 in New York.

Comments

After speaking to Luke on Twitter and listening to him on Macro Voices over the years, I am not sure if he understand how much of a fraud/credit Ponzi scheme most of the Chinese economy is. China got greedy and a lot has changed in the last 10 years, especially the last 3-4 years. If you watch the videos of many of the most prominent China vloggers on YouTube who are uploading using VPNs, they are being kicked out of the country or leaving before things get even worse for foreigners. Want to talk about xenophobia? China is becoming pretty anti-American, pretty rapidly. Trump and the tariffs are being blamed for all of the economic problems there now even though the problems started long before Trump won the 2016 elections...

Sorry Luke there is no way I can see the US in a severe recession and the world not close to death. I can see the end of the global dollar hegemony of course, but the intervening chaos will be terrible and another global war of sorts very likely.

Always interesting but I think the most interesting question was left untouched where at least I think they differ. What happens when we get a global recession and the USD appreciates initially?
My view which I think lines up with Luke’s is that even if the U.S. economy is relatively stronger than much of the world. The U.S. has a lower threshold for pain. If this is on Trumps watch, one way or another he will force the dollar down. If it under a Democratic president, it will go in the MMT direction and the dollar is unlikely to fair well.

Good discussion. Thanks. FX seems to me to have too many economic and political variables to have a coherent outlook. Like FX, gold does not have a coherent outlook, even within the separate frameworks in this discussion. I buy gold as a hedge against black swan events and for some growth in value over time. If the dollar is high, I buy a little more gold. It is similar to investing in the VIX when it is low. It is certainly possible for gold to markedly decline which may be a buying opportunity. Gold has a chance to recover over time. Options expire. I leave FX and options to the professionals. DLS

The Euro and Eurozone cooperation seem very fragile and likely to fall apart in the next year or two as Italy and other key Euro economies weaken once again. Intuitively that would seem to be to the dollar's benefit, but then think how strong the Swiss Franc is (despite extraordinary counteraction by its central bank)....and likely how strong the German mark and a few other ex-Euro currencies could be. And a much weaker Italian currency like the old 1990s Lira might be exactly the medicine Italy needs to reset as it routinely did in the past. Also, when global trouble hits the markets, the Japanese often repatriate their overseas assets, at least initially. The only thing any of us really know is that we in very uncharted territory and that gold - despite being hated as a "pet" rock by wall street bankers and others - has been the only truly durable currency throughout history (along with silver & diamonds etc.)

Brent, instead of closing your gold fund because it got too small to cover the cost of administrating it, did you consider selling calls on GLD on a portion of your fund's gold after the big rips higher?
I noticed during the 4th quarter stock market meltdown, USD did not act as a safe haven the way it traditionally does. It was down against the Yen, flat against the Euro, and down against gold. The correlation coefficient between gold and the USD Index changed markedly in Q4 2018. It will be interesting to see how USD acts against gold if there is another stock market meltdown in 2019.

Love this topic and listening to these two discuss it. But my nagging question remains... Brent & Luke both agree this grand experiment has gone on way longer than they ever imagined (and they are not alone... almost every guest on RV has said the same). If it's lasted 2X-5X longer than some of the smartest skeptics could ever have conceived, who's to say we won't be mired in this farce another 10, 15, 30 years? Monetary debasement went on for over 200 years in ancient Rome... is it really insane the suspect this can continue for another 30?

I am with you Joe! I thought 2001 was possibly the beginning of the end and then I thought 2008 was the end and now I think as long as interest rates can be kept low who knows when the crush will come? However, a high dollar or high interest rates (...nowadays thats like...5%) will most certainly herald the end.

Great video and a nice adjunct to their US $ segment. I was just hoping to hear both their views on the Debt Jubilee that is coming....What form it might take and if not a timing prediction the signposts and “tells” that would indicate it’s nearness—and, of course, some Portfolio positioning advice. Sooner or later RV and Macro Insiders needs to address this Elephant....they have the Rolodex of heavy thinkers who will certainly have different views....let’s go ahead and tackle the “end game” Milton!

I don't get how Luke can say people will never make money in Gold. This really reinforces my preconceived idea that Luke is good on conclusions, but not great on the path to those conclusions, where as Brett is better at nailing the path.

Good cop, bad cop.....Both of these guys obviously get a lot more attention together than they would if they didn't have the other as a foil. The fact is that they basically agree on almost everything except the timing. But if you own gold as "insurance" (its not really insurance when what you are insuring against is inevitable!) you don't have to lose sleep over it possibly declining somewhat in value before it eventually breaks out. That will just be like the tide going out before a tsunami. Unless you're allocating a lot more than 10% of your portfolio to gold (and therefore concerned about opportunity cost) what you should be losing sleep over is the possibility of being too late, not too early.

Somewhat interesting, but mostly unhelpful blah, blah, blah, blah. Bottom line: all investors (not traders) need to have 5-10% of their investment portfolio invested in gold as insurance. As discussed in this episode, the short -term price of gold may go up or it may go down (not useful advise for investors, and certainly not for traders). However, for investors, with the current world of expanding sovereign debt, it is probable that at some point the price of gold will increase significantly, and that will be at the point that the values of most financial securities priced in fiat currencies collapse. It will also be the point that you will be thankful that you purchased the appropriate insurance.

I think 5% just won't cut it Kirk, 10% is probably a minimum but its really a question of timing. At one point I was at 20% but honestly too fearful of seeing gold plummet back to $1,040 to maintain that level. It really looks like gold has a ceiling of 1350 to say....1395. If it breaks out from there then watch out as funds take a bite. I am biding my time on the metal but biting the miners very carefully.

Wholeheartedly agree Nick. Look below where Brent says he is starting a fund to take advantage of the "knock on effects." Title of the series is "Skin in the game" yet neither of them offer any substance but if you want to really know how Brent is playing it contact him because he is starting a fund...

Gents on China defaulting -no way- i think you miss this as a Communist country using a Capitalist formula to accomplish the goals of the politburo. Thank Deng Xiaping. Now please keep this in mind -the system owns the “capital goods and consumer goods” (Webster 101) that means all the wealth belong to the gov’t . The” bail in “ version of communist china is the peoples wealth, They will call it in ... the nation under XI is at it heart Maoist. You all should hire a Chinese historian on what they will do . I have one its worth every penny as we dont think like a communist ruler. Gold up but the dollar up only if euro goes the way of the dodo my call?

Hi Victor! If you look at the structure of the EUR, then if/as gold rises, the EUR "going the way of the dodo" becomes less likely (as gold rises, EUR reserves become higher % of gold as they are marked to market qtrly.)

Thanks to everyone for watching and commenting. FYI, some of my answers around current "skin in the game" allocations were lost in the editing process. So for those wondering, I am setting up a fund for accredited investors with Keith Dicker of IceCap to specifically play the knock on effects of what I believe will be a very strongly appreciating US Dollar. Anyone interested in more information is welcome to contact me directly. Thanks again for watching. Brent Johnson brent@santiagocapital.com

China after 08: "Oh those are the rules of the game? Hold my beer and watch this." Priceless insight AND laugh out loud funny.
Also a great distinction between the convertibility of USD to gold for individuals vs countries. At least so far...

Very theoretical and reasonable back round but some of the answers to questions were very convoluted and neither of these gentlemen provided great insight as to how they are positioned currently or how they would play the next move in the dollar or gold.

Hi Floyd, Steve. Thanks for your comments. Please see my comment above. Answers can also be found in my prior interviews where I discuss the Dollar Milkshake theory. That is how I am currently positioned. Thanks again. Brent

Brent: How high do you expect the dollar to get over the next few years? How low gold?
Luke: If Brent is right, at what price does the US Gov step in and squish down the price of gold? As you said, nobody wins if it gets to high.....

Thank you for responding Brent! Ok, Luke it's your turn....If the $ heads towards it's all time high back in the 1980's, at what point (if ever) will the US govt attempt to squish it down? To me, these answers are what matters in terms of getting ready....Thanks in advance Luke!

I must be honest, after perusing through the twitter beefs a while ago I left with the impression that Luke was tin foil hat wearing character. But I must say, after watching these last two RV interviews I've been so impressed at how bright and thoughtful he is that I am literally about to subscribe to FFTT.

Ok I listened don’t know what to think about where or why Gold goes from here!
Guess I’ll just continue to hold it just incase. Seems to me it’s been a dependable storehouse for thousands of years for some reason.

I grew tired of these two on twitter and now you bring them to real vision? Its like the both took the same twitter branding and promoting course. I always thought at least Luke makes some sense but then he talks here about how he has been levered long for the last 10 years, wtf.

Brent said no one makes serious money from Gold. That is bullshit and he knows it.
Yes, maybe if you're invested in GLD ETF or Physical Gold. But invest in the Gold miners at the right time like 2008 and you will make a killing.
I believe Brent got out of Gold too early and he is about to miss out on some serious gains!

Knowing Brent I would feel very comfortable saying he would agree that what you are proposing is absolutely a possibility. That being said Brent is FAR from alone in thinking the penultimate move up in the gold price (dollar down/severe lack of confidence) is imminent or probable right now. While you are perfectly justified in offering your opinion, perhaps it is worth remembering it is just than. An opinion. And folks like Brent (Jim Rogers for one of many) feel otherwise, AND have had their ticket punched in perhaps a few more places (with verifiable results over time) than those commenting here. But hey, that is what makes a market.

@Christopher. Brent said no one makes serious money from Gold, which was his opinion. However, my point supported by FACT is that you can if you invested in Gold miners at the right time.
My outlook that Gold is about to make some serious gains is however my opinion which I am playing through Gold Mining Stocks, GOLD in particular, which I'm up on +12% thus far.

Hi Steve. Thanks for watching. I think you are misinterpreting what I said. My comment was that our allocation was not meant to make us rich. It was to protect the rest of the portfolio. In any case, there is certainly a lot of opportunity to make significant profits (and lose significant part of your portfolio) by investing in gold miners.

Fascinating! Really enjoyed the debate. I am not sure if I am any the wiser about the likely direction of gold, the dollar or indeed Chinese debt, but it has proved helpful to get opposing views from two very clever gentlemen, who have given me serious food for thought, and a better handle on the nuances and complexities of the macro picture.

:personal view: We have ~20% of our NAV in physical Gold/Silver. Which I have built up over the last 4-5 years. I don't look at the price. I think of it as a hedge against the financial system. When the shit hits the fan I can sell my gold and buy whatever I need on sale i.e. property equities... My Gold will be my families springboard into the start of the next super-cycle when all this debt starts to matter and bring the house down.

@Christopher. In a Financial armageddon/meltdown situation, your Gold/Silver will probably get confiscated by your countries Government. Best to hold it in multiple private vaults worldwide outside your own country.

Hi Burton. Thanks for your comment. Unfortunately there is not always time to answer all different questions, etc. But I have answered this question on several occasions in other interviews here are RV. To sum them up, It is currently more about the dollar than it is about gold itself. As the dollar gets stronger I expect the knock on effects to be a headwind for gold. At some pt (I dont know when yet) I expect the damage that the strong dollar does to rest of the markets will cause them to both rise in tandem. Thanks again. Brent